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What does good management look like? We teach what we think are good management principles in literally thousands of business schools around the world. Yet Scott Cook, founder and leader of Intuit INTU -1.43% told us, “When MBAs come to us we have to fundamentally retrain them—nothing they learned will help them succeed at innovation.” Perhaps a stronger indictment comes from Elon Musk, founder of Tesla, SpaceX, Solar City and PayPal: “As much as possible, avoid hiring MBAs. MBA programs don’t teach people how to create companies … At my companies, our position is that we hire someone in spite of an MBA, not because of one.” While we generally recognize that management training has value, why do leaders of innovative companies offer such harsh criticisms? To answer that question, let’s start with a quick company illustration. Fifteen years ago, in 1999, Cisco systems was in the growth phase of the well-known “S-Curve” having launched a variety of innovative new methods and products for routing communications among computer networks. In fact, if there had been a 1999 Forbes list of the most innovative companies ranked by Innovation Premium (IP), Cisco would have been at the top of the list with a 68-percent IP. During its growth phase, Cisco, like all growth companies, needed to hire many new managers: these individuals excel at planning, analyzing and optimizing—skills business schools teach that are critical to scaling and managing an existing business. But what they aren’t taught in business school is how to create a customer (even today, how many MBA programs have required courses in product development?). Consequently, they can optimize and execute on an existing business but don’t seem to have the skillset to create innovative new products and services. Not surprisingly, as a company becomes dominated by managers with execution skills, the company starts to lose its innovation mojo. This gradually happened at Cisco, and by 2011 Cisco had dropped out of the top 100. Cisco’s leaders now see a need to reignite innovation—and they are taking action. But can they do it? Have any established companies successfully done it? Our 10-year study (see about the research) of the 526 public companies that are eligible for the Forbes “Most Innovative Company” list (ranked using the research behind The Innovator’s DNA and more recently with The Innovator’s Method—explained in more depth at learn.theinnovatorsmethod.com) shows that it is rare for companies to reignite their innovation capabilities—but it can be done. Less than 50 companies successfully increased their innovation premium (IP) by more than 20 IP percentage points, but Regeneron, Hindustan Unilever, Regeneron, Mondelez (Kraft), Godrej and Boyce, Marriott, and even AT&T, were among the companies that did. As we examined what they were doing differently, we discovered that each had made a major push to introduce a new set of management principles into the company. These were management principles frequently seen in start-ups—such as “design thinking” techniques to deeply understand customer needs and “lean start-up” techniques to rapidly experiment with solutions. These were the same techniques we’d seen used by companies on our “innovation stars” list, including Amazon and Salesforce.com. These companies have maintained an innovation premium above 40 percent and have done a remarkable job of institutionalizing the entrepreneurial management principles on which they were founded. Start-ups are fertile ground for these techniques because they are always trying to create a customer, not sustain a customer, and figuring out how to create a customer is always characterized by high uncertainty. That’s why design thinking, lean-start-up and agile software techniques are so often used in start-ups: because they are designed to solve high uncertainty problems. Complete Coverage of The World’s 100 Most Innovative Companies The World’s Most Innovative Companies is the definitive ranking of the 100 firms investors think are most likely to generate big, new growth ideas. What were these techniques? We discovered that successful innovators, whether in a corporation or start-up followed a similar process that we call the Innovator’s Method (see graphic). In brief, the innovator’s method consists of four steps to solve high-uncertainty problems and turn insight into a successful innovation. Step 1: Insight: Savor Surprises. Leverage questioning, observing, networking, and experimenting—to search broadly for insights about problems worth solving. Step 2: Problem: Discover the Job to be Done. Rather than starting with solutions, start by deeply exploring the customers’ need or problem—the functional, social, and emotional job to be done—to be sure you’re going after a problem worth solving. Step 3: Solution: Prototype the Minimum Awesome Product. Instead of developing full scale products, leverage multiple virtual prototypes to explore many solution dimensions, then iterate on each solution to develop a minimum viable prototype and eventually a minimum awesome product—one that truly delights on a particular dimension. Step 4: Business Model: Validate the Go-to-Market Strategy. Once you’ve nailed the solution, you’re ready to validate the other components of the business model, including the pricing strategy, the customer acquisition strategy, and the cost structure strategy. Innovators used this method to push beyond simple platitudes to “think differently” or “experiment.” Consider the case of Godrej and Boyce, a company that sells consumer goods in India. For 100 years it succeeded by bringing technologies developed abroad, such as refrigeration, to the wealthiest segment of the population. But as low-cost competitors—notably LG and Samsung—entered India, Godrej’s market share began to rapidly erode. As company leaders looked for ways to respond, they discovered a problem worth solving: 80 percent of Indian households lack refrigeration. As a company run for more than a century by the best business-school thinking, it immediately leapt to developing solutions. Navroze Godrej, director of special projects, recalls, “We imagined we would be making a shrunken down version of a refrigerator. Make it smaller, make it cheaper. And we had preconceived notions of how to build a brand that resonated with these users through big promotions and fancy ad campaigns.” Fortunately, before building the mini-refrigerator, they applied the Innovator’s Method. They started by trying to deeply understand the problem of why so many Indians didn’t have refrigeration. After hours and hours of observation in the field, they discovered that their initial solution didn’t fit the job to be done: a smaller version of a traditional fridge wouldn’t hit the price threshold for Indians who had limited budgets. Intermittent electricity, limited transportation (traditional distribution and repair facilities proved out of reach), and limited financing also discouraged potential customers from buying refrigerators. However, using a series of virtual prototypes and then minimum viable prototypes the Godrej team was able to iterate to what was eventually the minimum awesome product: A $50 cooler-shaped refrigerator with inexpensive solid-state cooling technology in a removable lid for easy servicing, and a battery to deal with intermittent power. They experimented with a radical new business model, making the “ChotuKool” accessible by selling them through India Post Office – which is in every rural village and connects to every home and business. They also made it affordable by leveraging a novel micro-financing scheme. The Chotukool, which won an Edison Innovation Award, is an example of the type of new initiative that has ignited the spirit and capabilities of innovation inside Godrej and increased the company’s innovation premium from 40 to 60 percent. If Godrej had been above our $10-billion market cap cutoff, they would have ranked eighth on this year’s most innovative companies list. In hindsight, these types of success stories sound easy but, in practice, the innovation process is messy and recursive. But we found that the most successful innovators consistently followed these four steps: they had processes to generate and capture many new insights; they had processes to deeply understand customer needs to ensure that they had nailed a problem worth solving; they used fast and cheap prototypes to broadly test a wide variety of solutions; and they experimented with different business models to take these new solutions to market. Applying these methods we saw Intuit multiply its revenue from successful new products tenfold over three years, Mondelez China turn itself into a successful $1 billion business after being close to failure, AT&T turn a negative innovation premium into a positive one, and Godrej create a new category of consumer product that sold through an entirely new distribution channel. As the pace of uncertainty continues to increase, managers will need to learn a new set of management tools. They need entrepreneurial management—the principles used in effective start-ups—rather than traditional management (see graphic: When to Use Entrepreneurial vs. Traditional Management). We are not saying that what we learn in business school is worthless. Rather, we are saying that while traditional management works well for problems of relatively certainty, they work poorly for problems characterized by high uncertainty. Our research shows that great innovators understand when to apply an “Innovation School” approach that encompasses the Innovator’s Method to create value rather than a “Business School” approach which excels at capturing value. (see: The Innovator’s Method: Bringing the Lean Start-up into your Organization from Harvard Business Review Press).